The Impact on California Nonprofits

The lack of formal policies and reliance on perceived “best practices” results in drastically inconsistent approaches to funding. In focus groups conducted by California Association of Nonprofits (CalNonprofits), nonprofits reported that their funders cover anywhere from 0% to 17% of indirect or overhead costs. And the nonprofits also reported inconsistencies in definitions of overhead, lack of standardization in grant applications, and the need to educate grantmakers around overhead issues.

Nationally and within California, research shows that funding for nonprofits organizations generally fails to cover the full cost of programs and services. Roughly seven in 10 nonprofits in California say the government funding they receive fails to cover the full cost of their services, according to Nonprofit-Government Contracts and Grants: California Findings a new report from the Urban Institute. A majority (64%) of California nonprofits reported that government contracts and grants pay only 10% or less for overhead costs. (Urban Institute, 2015).

Additionally, Nonprofit Finance Fund recently released the findings of the 2015 State of the Nonprofit Sector that included results from a survey of more than 1,100 nonprofit organizations across the state of California. The research revealed that the top challenges nonprofits are facing are achieving long-term financial sustainability, attracting and retaining staff and raising funding that covers the full cost (Nonprofit Finance Fund, 2015 State of the Nonprofit Sector Survey). When organizations were asked if funding covered the full cost of achieving outcomes, the overwhelming answer was “No.”

These limitations on full cost recovery lead to several problematic consequences in the nonprofit sector. In an article titled Paying for Not Paying for Overhead, authors Hager, Rooney, Pollack and Wing claim that overhead limitations impact critical capacity and infrastructure needs of nonprofits, including staffing and technology. They say, “Limits on administrative costs are a cause for concern because nonprofits must find ways to cover those costs. Trying to minimize overhead costs might lead nonprofits to offer low pay for administrative positions, making it difficult to recruit and retain skilled and experienced staff. Or they may forgo investments in technology, reducing productivity and effectiveness” (Hager et al., 2005).

Most nonprofits in the state are operating with little or no safety net, with 53% of nonprofits report having three months or less of cash of hand (Nonprofit Finance Fund, 2015). And for nonprofit organizations serving low-income communities, 60% of organizations reported having less than three months of cash readily available (Nonprofit Finance Fund, 2015). Lack of liquidity means scrambling to manage payroll, cutting or reducing programs, and reducing staff hours or eliminating staff positions. These organizations do not have the financial capital to withstand risk and adapt to changes in the communities they serve.

CALIFORNIA NONPROFITSOVERALL

13%

40%

53%

47%

MONTHSOF CASH

<1 Month

1 - 3 Months

TOTAL (Less Than 3 Months)

3 Months+

CALIFORNIA NONPROFITS SERVINGLOW-INCOME COMMUNITIES

14%

46%

60%

40%

While nearly 80% of nonprofit organizations have reported an increase in demand, only 44% said they could meet that demand. Among organizations serving low-income communities, only 35% of nonprofits could meet the demand for often critical safety net services. The result is that everyday people in our communities are being denied access to critical services from healthcare to workforce development to childcare.